Cracker Barrel's Original Growth Recipe

CBRL Group (Nasdaq: CBRL) opened its first Cracker Barrel store in Lebanon, Tenn., on Sept. 13, 1969. After a rapid expansion phase that stretched from the late 1980s through the 1990s, Cracker Barrel has become a more mature restaurant company and is trying to position itself appropriately. What's a Fool to make of the recent developments?

In addition to its 544 namesake stores, the company owns 142 Logan's Roadhouse stores and franchises 25 more. However, it is in the process of divesting Logan's, which accounts for about 12% of sales, to focus solely on its country-themed, homestyle-cooking restaurants. Yesterday's press release offered insight into the divestiture and 2006 results.

For the fourth quarter, Cracker Barrel reported that total sales grew 1.7% but that same-store restaurant sales fell 3% while same-store retail sales fell 4.9%. Logan's comps were flat. Total diluted earnings for the company jumped an impressive 39.2%, but most of that increase was due to the company's issuing $725 million in debt to repurchase 35% of its outstanding shares.

For the year, total sales grew 2.9% to $2.6 billion while diluted earnings came in at $2.50, up only slightly from $2.45 in the previous year, as a lower share count was offset by stock-option expenses of $0.15 included in this year's numbers. Total restaurant comps fell 1.1%, while retail comps fell 8.1%. For fiscal 2007, Cracker Barrel expects total sales of $2.4 billion, restaurant comps of 0% to 2%, and retail comps of 7% to 9%.

Management attributed weak same-store sales trends to rising gas prices and overall weak economic conditions in the Midwest. Additionally, it was not able to offer specific details on the Logan's restaurants, but the quarterly conference call indicated that a divestiture sounds imminent. CBRL's 2007 outlook still includes Logan's, since it is not yet considered a discontinued segment, but the company did offer, at the bottom of the earnings press release, pro forma figures for 2006 excluding any Logan's numbers.

The interesting thing about Cracker Barrel is that investors gain exposure to a dining and retail stock all at once. For 2006, restaurant sales account for about 80% of total Cracker Barrel store sales, while retail accounts for the remaining portion. Retail sales have been struggling as of late but are expected to recover in 2007 and continue to offer another revenue source from the consumers who dine at the restaurant.

Over the past three years, CBRL Group as a whole has generated about twice as much operating cash flow as it reports in net income. Most of that cash flow is reinvested into opening new stores and maintaining current ones, but there has been excess capital to repurchase stock and grow cash on the balance sheet.

As of now, I am impressed by the historical growth trends but would like to wait on the sidelines to see whether CBRL can revitalize nearer-term same-store sales growth in both dining and retail. Plus, the Logan's divestiture appears to be not far off, so the company should, with any hope, be able to pay off the debt it took on to repurchase shares. Its debt to capital now is much higher than the average for restaurant peers that include Applebee's (Nasdaq: APPB) , Brinker (NYSE: EAT) , Texas Roadhouse (Nasdaq: TXRH) , and Darden Restaurants (NYSE: DRI) .

In any case, Cracker Barrel has a decent track record of cash flow generation and top- and bottom-line growth. The stock could continue to be a winner once Logan's is sent packing and management can refocus on the store base it started 37 years ago this month.

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